
13.	Commitments and Contingencies

Environmental Matters

We own, or previously owned, properties that may require environmental remediation or action. We accrue all material loss contingencies relating to these properties that we believe to be probable of assertion and reasonably estimable. We continue to study and evaluate the extent of our potential environmental liabilities, but due to the numerous uncertainties surrounding the course of environmental remediation and the preliminary nature of several site investigations, in some cases, we may not be able to reasonably estimate the high end of the range of possible loss. In those cases we have disclosed the nature of the possible loss and the fact that the high end of the range cannot be reasonably estimated.

We regularly review our environmental liability for each site where we may be exposed to remediation responsibilities, but the costs are difficult to estimate. A number of steps are involved in each environmental remediation effort, including site investigations, remediation, operations and maintenance, monitoring and site closure. Site investigations and remediation efforts often develop slowly over many years. Each of these steps may, over time, involve a number of alternative actions, each of which can change the course and scope of the effort and ultimately also the cost. Many of these steps are dependent upon the approval and direction of federal and state environmental regulators whose policies, determinations and directions may change over time creating further uncertainty as to the timing and scope of remediation activities. In certain cases there are a number of other potentially responsible parties in addition to us, each of which may influence the course and scope of the remediation effort. The allocation of liability among the potentially responsible parties is subject to dispute and uncertainty at this time with respect to the sites noted below. These disputes could lead to adversarial administrative proceedings or litigation, with uncertain outcomes.

We estimate the range of loss for environmental liabilities based on current remediation technology, enacted laws and regulations, industry experience gained at similar sites and an assessment of the probable level of involvement and financial condition of other potentially responsible parties. Unless there is an estimate within a range of possible losses that is more likely than other cost estimates within that range, we record the liability at the low end of this range. It is likely that changes in these estimates and ranges will occur throughout the remediation process for each of these sites due to our continued evaluation and clarification concerning our responsibility, the complexity of environmental laws and regulations and the determination by regulators of remediation alternatives. The status of each of the sites currently under investigation is provided below.

Portland Harbor site. In 1998, the Oregon Department of Environmental Quality (ODEQ) and the Environmental Protection Agency (EPA) completed a study of sediments in a 5.5-mile segment of the Willamette River (Portland Harbor). Since then, EPA has extended the Portland Harbor site to approximately 11 miles of the Willamette River. The Portland Harbor site is adjacent to two upland sites owned by NW Natural that are discussed below as the Gasco upland and Siltronic upland sites. The Portland Harbor was listed by the EPA as a Superfund site in 2000, and we were notified that we are a potentially responsible party. We then joined with other potentially responsible parties (the Lower Willamette Group or LWG) to fund the Portland Harbor Remedial Investigation/Feasibility Study (RI/FS), as discussed below. The LWG submitted the draft Final Portland Harbor Remedial Investigation (RI) to EPA in 2011. The LWG submitted the draft Feasibility Study (FS) to EPA in March 2012. The EPA will use the information in the RI/FS to select a cleanup plan for the Portland Harbor Superfund Site. The draft FS provides a range of remedial costs for the entire Portland Harbor Superfund Site, which includes the Gasco/Siltronic Sediment site, discussed below. The range of costs estimated for various remedial alternatives for the entire Portland Harbor, as provided in the draft FS, is $169 million to $1.8 billion. NW Natural's potential liability is a portion of the costs of the remedy EPA will select for the entire Portland Harbor Superfund site. The cost of that remedy is expected to be allocated among more than 100 potentially responsible parties. NW Natural is participating in a non-binding allocation process in an effort to settle this potential liability. On June 22, 2012, EPA delivered a notice of non-compliance to the LWG with respect to the Baseline Human Health Risk Assessment the LWG submitted to EPA in May 2011 (BHHRA), as a component of the RI. The LWG has disputed the EPA’s claims that the BHHRA is in any way deficient or noncompliant and has initiated formal dispute resolution under the 2001 Administrative Settlement Agreement and Order on Consent issued by EPA to LWG.

Gasco/Siltronic Sediments. In 2009, NW Natural and Siltronic Corporation entered into a separate Administrative Order on Consent with EPA to evaluate and design specific remedies for sediments adjacent to the Gasco upland and Siltronic upland sites. The Gasco/Siltronic Sediments is part of the Portland Harbor Superfund site. NW Natural submitted a draft Engineering Evaluation/Cost Analysis (EE/CA) to the EPA in May 2012 to provide the estimated cost of potential remedial alternatives for this site. The EE/CA will provide a variety of remedial alternatives for the sediments at this site. The alternatives provided in the EE/CA are based on EPA requirements to develop costs for the various remedies described therein. At this time, the estimated costs for the various sediment remedy alternatives in the draft EE/CA range from $34 million to $350 million. After the EPA determines an appropriate alternative from the EE/CA, a remedial design will be produced. We have recorded a liability of $34.0 million for the sediment clean-up, which reflects the low end of the EE/CA range. We have recorded an additional liability of $11.4 million for the additional studies and design work needed before the clean-up can occur, and for regulatory oversight throughout the clean-up. At this time, we believe the sediments at this site represent the largest portion of our liability related to the Portland Harbor site, discussed above. We accrued at the low end because no amount within the range is considered to be more likely than another.

Other Portland Harbor. NW Natural incurs costs related to its membership in the Lower Willamette Group which is performing the RI/FS for EPA. NW Natural also incurs costs related to natural resource damages. In 2008, the Portland Harbor Natural Resource Trustee Council advised a number of potentially responsible parties that it intended to pursue natural resource damage claims at the Portland Harbor Superfund site. The Company and other parties have signed a cooperative agreement with the Natural Resource Trustees to participate in a phased natural resource damage assessment to estimate liabilities to support an early restoration-based settlement of natural resource damage claims. As of September 30, 2012, we have an accrued liability of $4.4 million for these claims, which is at the low end of the range of the potential liability because no amount within the range is considered to be more likely than another, and the high end of the range cannot reasonably be estimated at this time. This liability is not included in the range of costs provided in the draft FS for the Portland Harbor.

Gasco upland site. We own property in Multnomah County, Oregon that is the site of a former gas manufacturing plant that was closed in 1956 (Gasco site). The Gasco upland site is adjacent to the Portland Harbor site described above and has been under investigation by us for environmental contamination under the ODEQ Voluntary Clean-Up Program. It is not included in the range of remedial costs for the Portland Harbor site. In June 2003, we filed a Feasibility Scoping Plan which outlined a range of remedial alternatives for the most contaminated portion of the Gasco upland site. In December 2004, we submitted an Ecological and Human Health Risk Assessment to ODEQ, and in May 2007 we completed a revised Remedial Investigation Report and submitted it to ODEQ for review. The liability accrued at September 30, 2012 for the Gasco upland site is $8.7 million, which is at the low end of the range of potential liability because no amount within the range is considered to be more likely than another, and the high end of the range cannot reasonably be estimated.

In 2007, we also submitted a Focused Feasibility Study (FFS) for the groundwater source control portion of the Gasco site, which ODEQ conditionally approved in March 2008. We submitted our final design for source control in January 2012. ODEQ approved construction of the designed system but subsequently requested another component for source control outside the original design. Construction began in October 2012. Based on the information currently available for groundwater source control at the Gasco site and our current assumptions regarding the effectiveness of the source control system, we have estimated a range of liability between $16.8 million and $30 million, for which we have recorded an accrued liability of $16.8 million at September 30, 2012, which is at the low end of the range of the potential liability because no amount within the range is considered to be more likely than another. We are uncertain about the range due to potential additional ODEQ requirements and actions needed to meet those requirements, including uncertainty about how to meet the agreed standards set by ODEQ subsequent to the initial testing of the system and as part of the final remedy for the unpland portion of the Gasco site.

Siltronic upland site. We previously owned property adjacent to the Gasco site that now is the location of a manufacturing plant owned by Siltronic Corporation (the Siltronic upland site). The Siltronic upland site is also adjacent to the Portland Harbor site, but not included in the range of remedial costs for the Portland Harbor site. We are currently conducting an investigation of manufactured gas plant wastes on the uplands at this site for the ODEQ. The liability accrued at September 30, 2012 for the Siltronic site is $1.1 million, which is at the low end of the range of potential liability because no amount within the range is considered to be more likely than another, and the high end of the range cannot reasonably be estimated.

Central Service Center site. In 2006, we received notice from the ODEQ that our Central Service Center in southeast Portland (Central Service Center site) was assigned a high priority for further environmental investigation. Previously there were three manufactured gas storage tanks on the premises. The ODEQ believes there could be site contamination associated with releases of condensate from stored manufactured gas as a result of historic gas handling practices. In the early 1990s, we excavated waste piles and much of the contaminated surface soils and removed accessible waste from some of the abandoned piping. In early 2008, we received notice that this site was added to the ODEQ’s list of sites in which releases of hazardous substances have been confirmed. ODEQ has also added this site to its list of sites where cleanup is necessary. We are currently performing an environmental investigation of the property under the ODEQ’s Independent Cleanup Pathway. As of September 30, 2012, we have a liability accrued of $0.5 million for investigation at this site. The estimate is at the low end of the range of potential liability because no amount within the range is considered to be more likely than another and the high end of the range cannot reasonably be estimated.

Front Street site. The Front Street site was the former location of a gas manufacturing plant we operated. It is near but outside the geographic scope of the current Portland Harbor site sediment studies. The EPA directed the LWG to collect a series of surface and subsurface sediment samples off the river bank adjacent to where that facility was located. Based on the results of that sampling, the EPA notified the LWG that additional sampling would be required. As the Front Street site is upstream from the Portland Harbor site, the EPA agreed that it could be managed separately from the Portland Harbor site under ODEQ authority. Work plans for source control investigation and a historical report were submitted to ODEQ and initial studies were completed. In 2010, ODEQ required additional studies which were completed in 2012. The results of those studies have been presented to ODEQ and a final sampling plan required by ODEQ is currently being developed. As of September 30, 2012, we have an estimated liability accrued of $1.4 million for the study of the sediments and riverbank groundwater and soils at the site. The estimate is at the low end of the range of potential liability because no amount within the range is considered to be more likely than another and the high end of the range cannot reasonably be estimated.

Oregon Steel Mills site. See “Legal Proceedings,” below.

Accrued Liabilities Relating to Environmental Sites. The following table summarizes the accrued liabilities relating to environmental sites at September 30, 2012 and 2011 and December 31, 2011, which are recorded in other current liabilities and other noncurrent liabilities on the balance sheet:



	Current Liabilities						Non-Current Liabilities
	September 30,		September 30,		December 31,		September 30,		September 30,		December 31,
Thousands	2012		2011		2011		2012		2011		2011
Portland Harbor site:
Gasco/Siltronic Sediments	$	1,748	$	1,490	$	1,614	$	43,628	$	30,604	$	35,797
Other Portland Harbor	1,188		2,174		1,893		3,186		5,122		7,066
Gasco upland site	18,018		8,899		14,092		7,453		7,447		8,900
Siltronic upland site	511		721		887		592		114		128
Central Service Center site	100		5		—		445		530		495
Front Street site	942		—		1,697		452		765		—
Oregon Steel Mills	—		—		—		185		129		120
Total	$	22,507	$	13,289	$	20,183	$	55,941	$	44,711	$	52,506

Regulatory and Insurance Recovery for Environmental Costs. In May 2003, the OPUC approved our request to defer unreimbursed environmental costs associated with certain named sites, including those described above. Beginning in 2006, the OPUC granted us additional authorization to accrue interest on deferred environmental cost balances, subject to an annual demonstration that we have maximized our insurance recovery or made substantial progress in securing insurance recovery for unrecovered environmental expenses. In October 2012, the OPUC authorized a new mechanism for environmental cost recovery through rates. This Site Remediation Recovery Mechanism (SRRM) allows the Company to recover prudently incurred environmental site remediation costs. The rate case also establishes an earnings review related to this mechanism, which will be further defined in a future proceeding. The ultimate amounts we recover under SRRM will depend upon future insurance recoveries, future expenditures, prudency reviews, and the impacts of any earnings review the OPUC may adopt in a subsequent proceeding.

Beginning in 2011, the Washington Utilities and Transportation Commission (WUTC) authorized the deferral of certain environmental costs associated with services provided to Washington customers. Environmental costs related to Washington are being deferred as of January 26, 2011 with cost recovery and a carrying charge to be determined in a future proceeding.

On a cumulative basis, we have paid $69.6 million for environmental costs, including legal, investigation, monitoring and remediation costs, of which $4.9 million was paid and expensed prior to regulatory deferral order approval. At September 30, 2012, we had a regulatory asset of $128.2 million, which represents those amounts accrued, paid subsequent to regulatory deferral, and interest on those projects.

In December 2010, NW Natural commenced litigation against certain of its historical liability insurers in Multnomah County Circuit Court, State of Oregon (see Item 3. Legal Proceedings in the 2011 Form 10-K). NW Natural seeks damages in excess of $50 million in losses it has incurred to date, as well as declaratory relief for additional losses it expects to incur in the future. In December 2011, NW Natural reached a settlement with Associated Electric and Gas Insurance Services Limited and dismissed its claims against that insurer in the litigation.

Legal Proceedings

We are subject to claims and litigation arising in the ordinary course of business. Although the final outcome of any of these legal proceedings cannot be predicted with certainty, including the matter described below, we do not expect that the ultimate disposition of any of these matters will have a material effect on our financial condition, results of operations or cash flows as we would expect to receive insurance recovery or rate recovery. See also Part II, Item 1., “Legal Proceedings.”

Oregon Steel Mills site. In 2004, NW Natural was served with a third-party complaint by the Port of Portland (the Port) in a Multnomah County Circuit Court case, Oregon Steel Mills, Inc. v. The Port of Portland. The Port alleges that in the 1940s and 1950s petroleum wastes generated by our predecessor, Portland Gas & Coke Company, and 10 other third-party defendants were disposed of in a waste oil disposal facility operated by the United States or Shaver Transportation Company on property then owned by the Port and now owned by Oregon Steel Mills. The complaint seeks contribution for unspecified past remedial action costs incurred by the Port regarding the former waste oil disposal facility as well as a declaratory judgment allocating liability for future remedial action costs. No date has been set for trial. Although the final outcome of this proceeding cannot be predicted with certainty, we do not expect that the ultimate disposition of this matter will have a material effect on our financial condition, results of operations or cash flows.